ECB monetary policy on autopilot until the summer of 2019

At yesterday’s meeting of the Governing Council, the European central bankers decided to extend the asset purchase programme (APP) until the end of the year. If inflation moves in the direction desired by the central bank, then the volume of monthly net asset purchases will be reduced to EUR 15bn from October. Under the conditions mentioned, net purchases would then end in December. In order to pre-empt any undesired speculation on rate hikes, the ECB has radically adjusted the forward guidance on its benchmark rate. The central bankers now assume that interest rates will remain unchanged at least through the summer of 2019. What is unusual in this context is that the ECB is committing itself for such a long period of time. This has been interpreted by market players as a „dovish“ signal and the Bund Future responded with price gains. However, it is impossible to deduce with certainty from the forward guidance itself to what extent the ECB „might“ consider a rate hike in the autumn of 2019 or even at a later stage.

Irrespective of weaker European economic data of late, the ECB remains confident about growth prospects. This is reflected in the fact that GDP projections for the time frame 2019/2020 have been left unchanged. The risks to the growth outlook are still seen by the central bankers as „broadly balanced“. However, Mr. Draghi has admitted that the increase in protectionism is a cause for concern. It is worth mentioning that the ECB staff estimate for inflation has been revised sharply upwards. The projection for 2018 and 2019 has been lifted to 1.7% under the influence of the recent rise in the price of crude oil.

Even though the ECB’s decision to end monthly asset purchases (net new) is now signed, sealed and delivered, the bank’s monetary policy will remain highly expansionary until further notice. In this context, the reinvestment of paper maturing in the APP portfolio will become increasingly important, and indeed, Mr. Draghi has consistently underlined this fact at previous meetings of the Governing Council. In order to secure favourable funding conditions, reinvestment will continue „…for an extended period…“. Assuming there are no radical changes in fundamental conditions for the eurozone, the ECB’s Governing Council meetings are likely to be rather dull in the next few months. The ECB’s monetary policy will be on autopilot until further notice.

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